2015 Earnings Review: Weak Commodity Prices Drive Down Schlumberger’s Earnings; Company Expects The Oil Slump To Continue Through 2016
In the wake of the ongoing oil slump, Schlumberger (NYSE:SLB), world’s largest oilfield services company, reported a weak set of 2015 financial numbers last week [1]. The oilfield contractor continued to witness a contraction in drilling activity demand and pricing pressure, particularly in North America. This resulted in a notable decline in its operating margins, despite the company’s proactive cost reduction measures and efficiency improvements from its Transformation program. Despite a challenging outlook for oil prices, the company aims to survive the current downturn through its continued cost control measures and focused mergers and acquisitions. Let’s look at the factors that dominated Schlumberger’s performance in 2015 and its outlook going forward.
Source: Google Finance
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The 50% drop in oil prices in 2015 created a strong pricing pressure on the oil and gas companies, which prompted them to cut down their exploration and production budgets for the year. This, in turn, caused a slack in the demand for oilfield equipment and services, resulting in a significant fall in the rig count globally. The US rig count slipped to 698 units at the end of 2015, 62% lower compared to 2014, while the international rig count averaged at 1,167 units, 13% below the previous year [2]. As a result of this decline, industry giant, Schlumberger, posted consolidated revenue of $35.7 billion, representing a decline of 27% on a year-on-year basis, primarily driven by the 39% drop in its North American revenue. Besides, the company’s international markets also delivered lower-than-expected results due to the activity disruptions in the Middle East and Asia, budget reductions in Colombia and Brazil, and the weakening of the currency in Argentina.
On the cost side, Schlumberger took proactive cost and resource management measures to sustain its margins in the prevailing commodity down cycle. The company cut down more than 34,000 jobs and streamlined its overhead infrastructure and asset base over the last one year, in order to reduce its operational cost. However, despite this, the company suffered a meaningful contraction in its earnings for the year. Schlumberger’s pre-tax earnings fell to $6.5 billion compared to the $10.6 billion generated a year ago, causing a decline of 38% on a year-on-year basis.
Returning Value To Shareholders Even In The Current Downturn
At a time when most of the companies in the oil and gas industry are preserving their cash flows by restricting or suspending their dividends, Schlumberger returned a significant portion of its free cash flows to its shareholders. Of the $5 billion worth of free cash flows generated by the company during the year, it returned $4.6 billion to shareholders in the form of dividends of $2.4 billion and share repurchases of $2.2 billion. Further, the company has approved a new $10 billion share buyback program. The new program will be effective after the existing $1.4 billion of authorization under the current program is completely exhausted. While the move might seem unreasonable to some, we see this as a strategic decision aimed at reinforcing investor confidence in the company and its ability to weather the current downturn.
See Our Complete Analysis For Schlumberger Here
Update On Cameron Acquistion
In 2015, Schlumberger announced its plans to acquire Cameron International (NYSE:CAM), an oilfield equipment maker, in a stock-and-cash transaction of $14.8 billion. The deal will enable Schlumberger to offer the industry’s first integrated drilling and production system to the oil and gas industry clients. The transaction was unanimously approved by the boards of directors of both companies and received antitrust approvals from the US, Canada, Russia, and Brazil. Consequently, the company expects to close the deal with Cameron in the first quarter of 2016. Further, in order to fund the deal, the company issued debt notes of $6 billion, with maturities ranging from 2017 to 2025. While we believe that the deal may not add to the margins in the current environment, it is likely to provide a boost to the company’s earnings when the market recovers.
Going Forward
Schlumberger forecasts an extremely challenging outlook for the oilfield services industry in 2016, as it expects the fears of a slowdown in the Chinese economy and oversupply in the crude oil market to weigh heavily on global drilling activity. The company expects the exploration and production budgets to remain low during 2016, implying that the oil price recovery would take place only in the later half of 2016, pushing the rebound in drilling demand to 2017. Thus, in order to overcome this down cycle the company will continue to focus on managing its operating costs and accelerate the implementation of its Transformation program. Moreover, the company aims to continue to expand its portfolio through targeted merger and acquisition activity, such as the Cameron deal.
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Notes:- Schlumberger Announces 2015 Results, 21st January 2015, www.slb.com [↩]
- Baker Hughes Rig Count [↩]